Owning Lakeshore Property With Others -
"Can't we all just get along?"
by Carter DeLaittre
As published in the March 15, 2002 issue of Outdoor News
The rapidly escalating cost of lakeshore property has made the dream of owning a "cabin up north" seem out of reach for many potential buyers. To keep the dream alive, buyers are teaming up to purchase property. Whether it's two married couples or a group of friends, many buyers are finding that lakeshore property is more affordable than originally thought when the financial burden is shared with others.
As may be expected, this form of ownership can have its own set of problems. Friendships sour. Couples get divorced. Minor disagreements turn into major disputes. What once seemed like a good idea may become a disaster.
Buyers taking "the plunge" with others must go into this type of relationship with their eyes wide open. Important issues must be fully discussed before a purchase agreement is signed. Prior to closing, all of the owners should sign a written agreement describing their rights and obligations regarding the property.
Here are some issues to consider.
Title to the Property. Who should hold title to the property? Some buyers prefer to take title in their individual names. This often is the case with two married couples. Ownership is frequently structured so that each couple owns a one-half interest in the property, and, if one spouse dies, the surviving spouse automatically owns all of that couple's entire one-half interest.
Establishing title in individual names, however, can have some drawbacks. What if a named title owner wants out? What if a tax lien or judgment lien attaches to a named title owner's interest? What about a bankruptcy? Holding title in individual names can require the filing of additional deeds to add or remove an owner's name from the record title and can result in unanticipated involuntary lien problems. How would you like to end up owning your cabin with one of your buddy's creditors?
To avoid some of these problems, many buyers choose to form a separate legal entity to hold title to the property, such as a partnership, corporation, limited liability company (LLC) or limited liability partnership (LLP). The entity owns the property. The individual buyers each own an interest in the legal entity (i.e., stock, membership interest or partnership interest).
If one of the individual owners wants out, the record title to the property does not need to be changed. Transfers of individual interests are handled internally and do not affect the record title. Corporations, LLCs and LLPs offer the added advantage, in most cases, of shielding the individual owners from liability for certain acts or injuries that occur on the property.
Holding title in a legal entity is not for everyone. You will incur expenses for preparing the necessary documents and paying filing fees. Obtaining financing for the property may become more cumbersome and there may be an impact on your ability to deduct certain expenses for tax purposes. Seek appropriate legal and tax advice before settling on this form of ownership.
Property Decisions. Your written agreement should describe the procedure for voting on decisions that affect the property. Which ones require unanimous consent; which require a simple majority? Major decisions requiring unanimity might include the sale or mortgage of the property, the placement of the property in a rental pool, the design and construction of improvements and the purchase of appliances, equipment and furniture.
If all owners have an equal equity stake in the property, each may be entitled to one vote. If some owners have invested more equity, voting according to the owners' respective percentage interests may make more sense.
Management/Expenses. Too many cooks spoil the broth. Consider appointing one of the owners to act as the "manager" to pay expenses and maintain accounting records. The manager also should be the contact person for issues that arise regarding the property.
Maintain a single checking account for paying all expenses. Each individual owner should deposit into the account, on a monthly basis, his or her portion of the mortgage payment (if any) and his or her prorated proportionate payment for annual real estate taxes, insurance premiums and utilities. How about setting up a direct deposit program where each owner's employer automatically deposits a certain amount in the checking account on every payday? That way, the money will be there when needed and the manager will not have to chase the individual owners for payment.
Individual Use. Your written agreement should establish a method for scheduling the different owners' use of the property during a calendar year. How are you going to allocate time for Memorial Day, the Fourth of July and Labor Day?
You may wish to place restrictions on the use of the property by non-owners. What about personal property located at the cabin - is it truly personal in nature or is it available for common use by all owners? Each owner should be responsible for leaving the property clean, neat and tidy after his or her period of use. Draw up a list of rules and keep them posted on the property.
Restrictions on Transfer. Your written agreement should place reasonable restrictions on the right of an owner ("selling owner") to transfer or encumber his interest in the property. The other owners generally will want the right to purchase the selling owner's interest in the event of a "triggering event," - the selling owner's death, an involuntary transfer of the interest, a transfer by court order (e.g., a bankruptcy or divorce), or notice of the selling owner's intent to sell his interest. This gives the other owners some degree of control over who they may end up owning the property with. The agreement also should contain terms describing methods of valuing a selling owner's interest in the property, how to handle a dispute on valuation and the general payment terms for purchasing a selling owner's interest.
Mediation/Arbitration. What happens when a dispute arises that can't be resolved amicably? How about giving non-binding mediation a first crack? If that doesn't work, consider opting for binding arbitration (except for matters that are required by law to be decided in court). Avoid litigation. It generally takes too long and is way too expensive. It also can cause irreparable damage to a friendship.
Memorandum of Agreement. Consider filing a short form memorandum of your written agreement in the county real estate records. The memorandum does not have to disclose confidential information, but at a minimum, should give the names the owners, the legal description of the property and a brief description of any important terms, especially restrictions on transfer. The idea is to place third parties on notice of these restrictions in order to avoid future surprises
